Israelis Staggered by New Taxes; Cabinet Authorizes a 7.5% Sales Tax and a 7.5% Payroll Tax

February 25, 1975

JERUSALEM (Feb. 24)

Israelis were staggered today by the announcement of new taxes, the effects of which will be higher prices, lower living standards and the prospect of increased unemployment. The new tax package, authorized by the Cabinet at a tense five-hour meeting yesterday and formally presented to the Knesset by Finance Minister Yehoshua Rabinowitz this morning, includes a new 7.5 percent sales tax on top of the existing ones and a 7.5 percent payroll tax, payable by employers.

The tax increases, combined with a 20 percent hike in the cost of postal services which include telephone and telegraph, will help finance a record IL 56 billion (about $8.05 billion) budget for fiscal 1975 which the Finance Minister presented to the Knesset this morning. The new levies are calculated to extract an additional IL 2 billion from the Israeli public, already burdened by one of the highest tax rates in the world.

Economic experts estimated that the new measures will lead to a general 5-7 percent rise in prices. According to the Finance Ministry, some items will go up in cost immediately and others within a few months. The new sales tax, which went into effect this morning, does not include basic food items, petroleum, electricity, water, public transportation and industrial equipment. But it does hit such consumer products as coffee, cigarettes, soap and cosmetics, (See separate story.)

LABOR, MANAGEMENT FURIOUS

Israelis, who had expected a breathing spell after the 43 percent devaluation of the Israel Pound last October forced prices up by 56 percent, were stunned by the new measures. The 7.5 percent payroll tax brought a furious reaction from Histadrut and employers alike.

Peleg Tamir, director general of the Israel Manufactures Association, declared, “This is a very heavy burden on manufacturers who are in any case faced with a serious liquidity crisis. The (payroll) tax will result in higher prices for commodities, fewer buyers and, consequently a decrease in employment.”

Marc Mosciewitz, president of the Manufacturers Association, agreed that the tax will cause an inevitable decrease in consumption and the consequent dismissal of a certain number of workers. Yeruham Meshel, secretary-general of Histadrut, who just returned from a visit to Scandinavian countries, said he was “surprised” by the government’s action and would have an official comment later.

But other Histadrut leaders claimed they were “misled by the government.” They noted that the government and Histadrut had an agreement that there would be no new taxes until labor contracts expire next July. Histadrut was expected to fight for full compensation for the new price rises in the form of additional cost-of-living allowances and oppose any freeze on c.o.l. allowances which has been urged by the government.

NEED TO ADJUST TO LOWER LIVING STANDARDS

Rabinowitz said the public had to realize the severity of Israel’s economic situation and adjust itself to lower living standards. He said “The past year was one of the most difficult in our history” economically. He noted that Israel must continue to spend massive sums on defense while struggling to pay off the debts of the Yom Kippur War which, he said would take a decade of growth to pay for. Rabinowitz stated that the austerity economic measures taken by the government last fall were beginning to show positive results, mainly an increase in the government’s foreign currency reserves.

Financial experts and economic theoreticians tended to agree with the Finance Minister, although they conceded that the new measures will be a blow to the average citizen who is still struggling to adjust to last year’s austerity measures.

Dr. Ernest Yaffe, director general of the Bank Leumi, Israel’s largest private bank, said the new taxes were a natural follow-up to the earlier measures. “It is a tough line and more difficult decisions are ahead of us. But this is the right line that will divert national production to the right destinations leaving only a smaller part for our own consumption,” Yaffe said.

SOME IL 22 BILLION FOR DEFENSE

The government attempted to sweeten the pill by announcing that there would be no rise in municipal taxes. Instead, local authorities will be given grants. But that promise failed to mollify Pinhas Eilon, chairman of the Local Authorities Center. “The government cannot regard the local authorities as their agencies,” Eilon said. “They are independent and have functions to be filled. The government grants are obscure. No one knows as yet how big the grants will be or if they will provide for the needs of the local authorities,” he said.

The largest single portion of Israel’s new budget is ear-marked for defense–some IL 22 billion (about $3.5 billion). Israelis are used to this but the impact of the new taxes only four months after the devaluation of the Pound created stunned disbelief. One editorialist commented today that the government’s action showed no evidence of forethought but was simply a “self-rescue” step that “leaves the impression that the country is being carried on the waves of a storm over which we have no control and no plans.”